LO v KJS ECO-FRAMEWORK SYSTEM

PHIL INC G.R. NO 149420 (2003)

FACTS: Respondent KJS Eco-Framework
System is a corporation engaged in
the sale of steel scaffoldings, while
petitioner Sonny Lo, doing business
under the name of Sans Enterprises,
is a building contractor.
1. In February 1990, petitioner
ordered scaffolding equipments from
the respondent amounting to P540,
425.80. He paid a down payment of
P150,000 and the balance was to be
paid in 10 monthly installments
2. However, Lo was only able to pay
the first 2 monthly installments due to
financial difficulties despite demands
from the respondent
3. In October 1990, petitioner and
respondent executed a deed of
assignment whereby petitioner
assigned to respondent his receivables
of P335,462.14 from Jomero Realty
Corp
4. But when respondent tried to
collect the said credit from Jomero
Realty Corp, the latter refused to
honor the deed of assignment because
it claimed that the petitioner was also
indebted to it. As such, KJS sent Lo a
demand letter but the latter refused to
pay, claiming that his obligation had
been extinguished when they
executed the deed of assignment
5. Subsequently, respondent filed an
action for recovery of sum of money
against petitioner.
6. Petitioner argued that his
obligation was extinguished with the

execution of the deed of assignment of

credit. Respondent alleged that Jomero
Realty Corp refused to honor the deed
of assignment because it claimed that
the petitioner had outstanding
indebtedness to it
7. The trial court dismissed the
complaint on the ground that the
assignment of credit extinguished the
obligation
8. Upon appeal, CA reversed the trial
court decision and held in favor of KJS.
CA held that
a. Petitioner failed to comply with his
warranty under the deed
b. The object of the deed did not
exist at the time of the transaction,
rendering it void under Art 1409 NCC
c. Petitioner violated the terms of
the deed of assignment when he failed
to execute and do all acts necessary
to effectually enable the respondent to
recover the collectibles
ISSUE: WON the deed of assignment
extinguished the petitioners
obligation
HELD: No, the petitioners obligation
was not extinguished with the
execution of the deed of assignment.
An assignment of credit is an
agreement by virtue of which the
owner of a credit, known as the
assignor, by a legal cause, such as
sale, dacion en pago, exchange or
donation, and without the consent of
the debtor, transfers his credit and
accessory rights to another, known as
the assignee, who acquires the power

to enforce it to the same extent as the

assignor could enforce it against the
debtor.
In dacion en pago, as a special mode
of payment, the debtor offers another
thing to the creditor who accepts it as
equivalent of payment of an
outstanding debt. In order that there
be a valid dation in payment, the
following are the requisites: (1) There
must be the performance of the
prestation in lieu of payment (animo
solvendi) which may consist in the
delivery of a corporeal thing or a real
right or a credit against the third
person; (2) There must be some
difference between the prestation due
and that which is given in substitution
(aliud pro alio); (3) There must be an
agreement between the creditor and
debtor that the obligation is
immediately extinguished by reason of
the performance of a prestation
different from that due. The
undertaking really partakes in one
sense of the nature of sale, that is, the
creditor is really buying the thing or
property of the debtor, payment for
which is to be charged against the
debtors debt. As such, the vendor in
good faith shall be responsible, for the
existence and legality of the credit at
the time of the sale but not for the
solvency of the debtor, in specified
circumstances.
Hence, it may well be that the
assignment of credit, which is in the
nature of a sale of personal property,
produced the effects of a dation in
payment which may extinguish the
obligation. However, as in any other
contract of sale, the vendor or

assignor is bound by certain

warranties. More specifically, the first
paragraph of Article 1628 of the Civil
Code provides:
The vendor in good faith shall be
responsible for the existence and
legality of the credit at the time of the
sale, unless it should have been sold
as doubtful; but not for the solvency of
the debtor, unless it has been so
expressly stipulated or unless the
insolvency was prior to the sale and of
common knowledge.
From the above provision, petitioner,
as vendor or assignor, is bound to
warrant the existence and legality of
the credit at the time of the sale or
assignment. When Jomero claimed
that it was no longer indebted to
petitioner since the latter also had an
unpaid obligation to it, it essentially
meant that its obligation to petitioner
has been extinguished by
compensation. In other words,
respondent alleged the non-existence
of the credit and asserted its claim to
petitioners warranty under the
assignment. Therefore, it necessary
for the petitioner to make good its
warranty and pay the obligation.
Furthermore, the petitioner breached
his obligation under the Deed of
Assignment, to execute and do all
such further acts and deeds as shall
be reasonably necessary to effectually
enable said ASSIGNEE to recover
whatever collectibles said ASSIGNOR
has in accordance with the true intent
and meaning of these presents.
Indeed, by warranting the existence of
the credit, petitioner should be

deemed to have ensured the

performance thereof in case the same
is later found to be inexistent. He

should be held liable to pay to

respondent the amount of his
indebtedness.